Many people are interested in forming their own business but don't know how to go about it.
Forming a new LLC can be confusing and complicated, especially if you're unfamiliar with the process. Vital documents like the LLC operating agreement and articles of organization may seem foreign to you.
That's why we created this blog post for you! We'll walk through every step necessary to create an LLC in California so that you can get started on your project right away.
Who Should Create a Limited Liability Company in California?
The decision to create a California limited liability company is dependent on the taxpayer's tax situation and level of business activity.
Your legal advisor can assess your tax situation and provide guidance on various aspects, such as the operating agreement.
An LLC may be appropriate for you if you want liability protection, want to take advantage of pass-through taxation, or your business owns or rents real estate.
An LLC is a less expensive way to go for many individuals who are thinking about forming a new company.
The Pros of Forming a California LLC
The primary benefit of an LLC in California is that its members have a mix of the protections offered by a corporation and those available in a partnership.
The same limited personal responsibility protection that shareholders of a company receive is provided to members of an LLC.
The member's personal assets are shielded from being taken for debt or other obligations in the case of any legal action.
Members of an LLC can choose to register the company as a multi-member partnership or as a sole proprietorship.
This allows income taxes to flow through the LLC and be collected by its members, which means it is not taxed. All these will be enumerated through the operating agreement.
The Cons of Forming a California LLC
California taxing authority imposes high taxes on LLCs. This is why LLC owners are required to pay annual Franchise tax, which significantly increases their expenses as business owners. In case you report income over $250,000, the tax rate is even higher.
Because of the many tax drawbacks that weigh on California LLCs, it is a difficult method to run a firm.
How to Create a California LLC?
Setting up a limited liability company requires complying with state law requirements that are different from state to state but typically includes picking a business name and filing articles of organization with the secretary of state or other specified agency. There are a few additional steps too.
Step 1: Finding a Suitable LLC name
Picking a business name for your LLC is the first step in establishing your business.
Your California LLC's name must be unique and distinguishable from other names on the California Secretary of State records, which is why you should avoid using certain words or phrases that would otherwise be allowed for personal use.
You cannot use any restricted word/term as part of your business name without the consent of the California Secretary of State. Limited words/terms include any terms associated with any government agency (Treasury, State Department, etc.).
For a detailed list of restricted LLC terms, make sure to check California's Code of Regulations section.
Apart from the terms, you can't use, your LLC will have to include any of the following abbreviations or terms in its name: LLC, LLC, Ltd., Limited, Company, or Co.
You may also utilize the California Secretary of State's website and check if your desired name is already taken.
Keep in mind that this step is pivotal because you won't be able to complete the next step without it.
Step 2: Find a California Registered Agent
An LLC requires a registered agent to conduct business. The person or company that you pick as your agent will be in charge of receiving essential legal and tax documents on behalf of the LLC.
Search the internet and check with your personal network to find a registered agent in California.
Many reputable companies will offer their services for free or at a very affordable rate. A registered agent fee will usually range from $25 to $100 per year.
Once you have decided on a registered agent company, complete the forms required by your new business and send them over for processing, like the operating agreement.
Once you find a reputable California registered agent company, they will provide you with a unique account number associated with your new business.
You will need this information to log into the registered agent service company's website and complete any necessary forms required by your LLC in California.
Step 3: File California LLC Articles of Organization
Registering a California LLC is usually as simple as filing Articles of Organization. The state business entities filing fee is $70 and takes a few business days to process the Articles of Organization once submitted by mail or in person at your local Secretary of State's office.
You can register an LLC with any county. However, you must obtain a registered agent service for that location if necessary.
You can file Articles of Organization through the California Secretary of State.
You will download and fill out an application, sign it in front of a notary public, include payment by check or cashier's check made payable to "Secretary of State," and mail them all together to the California Secretary of State.
You can also opt for expedited registration by mail or online, but keep in mind that you will be charged an additional filing fee. You can opt for 24-hour registration, same-day registration, or 4-hour registration.
Read More: Best LLC Services in California
Step 4: File LLC Initial Statement of Information
The California Secretary of State requires that all LLCs submit an Initial Statement of Information (also known as Form LLC-12) within 90 days after formation. You can complete it online, in person, or by mail.
You will have to pay a $20 non-refundable filing fee.
Obtain a California LLC EIN
Every LLC in California is required to obtain an EIN (Employer Identification Number). You can obtain one online in under five minutes.
To register the LLC, you will have to provide a Federal Tax ID number which is another name for your EIN.
If you do not already have one from a previous business, then apply for it immediately because time is of the essence.
There are two ways to obtain a Federal Employer Identification Number: either through the IRS or through your state government (in this case, California).
It is much quicker and easier to go online and apply for it on the official website of the Internal Revenue Service. You will be issued one immediately upon completing a simple application form.
EINs are required if you plan to hire employees, open a bank account for your LLC or pay state and federal taxes on behalf of the LLC.
An EIN is not an official document but merely proof that you comply with all federal tax regulations and have applied to become part of their system as employers or taxpayers. It will be used when reporting earnings, losses, etc.
If you've been working as a sole proprietor and want to convert to an LLC, you will have to obtain a new EIN.
Step 8: Obtain LLC Licenses and Business Permits
Califonia licensing requirements vary depending on the business type and location of the business.
If you plan to conduct business in Los Angeles County, be aware that some counties require additional permits or licenses for your LLC. Most California business owners can file an application online at the state's website.
The Secretary of State does not grant California business licenses or permits. The best way to check the type of business licenses you need is to visit the CalGold website.
This online database links and contact information for government offices that issue business licenses, permissions, and registration requirements at all governmental levels.
For federal business licenses, check the U.S. Small Business Administration (SBA) guide.
Other Essential Steps
Provided that you've completed the registration of your LLC, there are a few other things to keep in mind.
LLCs offer asset protection, but on one condition - you need to separate your personal assets from your business assets.
That means you'll likely have to open a separate bank account for your LLC and one for your personal use.
It's also advisable to lay the grounds for future challenges by getting business insurance for your California LLC.
There are different types of insurance you want to have, including:
- Employee's compensation insurance: This covers you in case one of your employees gets injured. It also shields your business against lawsuits and claims by protecting the assets if a lawsuit is filed against the LLC.
- General liability insurance: Covers various damages that may happen to other people or their property while on company grounds or using company services.
- Professional liability insurance (optional): Professional LLCs may want to consider this type of insurance as it covers you from lawsuits filed against the LLC for professional negligence or malpractice.
- Property insurance: Covers damage to your property and equipment with high values in case of fire, theft, etc.
How Are California LLCs Taxed?
A limited liability company in California is treated as a disregarded entity by default unless it files for S-Corp or C-Corp tax status.
There are several state taxes you might have to register for.
Sales tax - sales tax is taxed on the total amount of sales made. The tax rate in California is 7.25%.
Annual franchise tax - The Franchise Tax Board requires that LLCs pay an $800 fee every year whether or not profits have been generated.
The only circumstances that qualify for an exemption from this requirement are if the LLC does not do any business in California during the tax year and its tax year is 15 days or fewer in length.
Employer tax - hiring employees within the state of California requires LLCs to pay an employer tax which is a percentage of wages paid. The rate for this varies depending on how many employees are being hired and what county they reside in. However, it does not exceed 100%.
Biennial Report - Every two years, every California LLC must file a Statement of Information (sometimes referred to as a "Biennial Report"). Your first Statement of Information is due within 90 days of the Secretary of State's approval.
This is needed to keep your company valid with the California Secretary of State.
Do You Have to Pay the $800 California LLC Fee the First Year?
No, owners don't need to file Form 3522 because your California LLC does not have to pay the $800 franchise tax for its first year. In the second year, Form 3522 will be required.
What Happens if You Don’t Pay California Franchise Tax?
If you fail to pay the entire amount shown on your annual tax return by the original due date, you will be charged a penalty of 5% of the unpaid tax and an additional 0.5 percent of the unpaid tax for each month or part of a month it remains unpaid.
Is the California Franchise Tax Board the Same as IRS?
The California Franchise Tax Board (FTB) enforces state income tax rules, while the IRS governs federal income taxes. When a person fails to pay an outstanding tax amount that is due and owing, the FTB will take enforcement actions against them.
Can I Be My Own Registered Agent in California?
Yes, you can act as your registered agent in California, but you must disclose your name and address to the public. Many business owners dislike the trouble involved with this, primarily the lack of privacy. Hiring an agent keeps your information out of the public eye.
Who Can Open a Business Bank Account For a California LLC?
A business bank account may be opened on behalf of an LLC by an LLC member or its authorized manager.
If your LLC is a multi-member entity, you'll almost certainly be required to submit information for anybody with 25% or more ownership in the company to open an account.
How Long Does It Take To Get LLC Approved in California?
California LLC formation process takes up to 5 days maximum. If you choose to register during the winter months, approval may take up to a week. Keep in mind that you can create a Limited Liability Company online or by mail, which shortens the waiting process, especially if you opt for expedited processing.
What Is a California Agent for Service of Process?
Agent for service of process is another term for the agent. It's a person or a company that is appointed by a business entity to receive official legal papers and other official legal documents so that your LLC in California can remain in good standing with the state.
Is a Single-Member LLC a Disregarded Entity in California?
A single-member LLC is a disregarded entity in California for tax purposes. California law allows other pass-through entities to own your SMLLC as well. In order to form a single-member LLC in CA, you need to file Form 568, even though you are a disregarded entity.
If you're thinking about setting up a California LLC, we encourage you to follow tried and trusted methods.
Many pitfalls can happen when formulating your business roadmap, so don't miss out on any of the steps in this process because it could end badly for your company.
The best way to ensure your company is set up correctly for success is by working with an experienced legal team who has plenty of experience setting up Californian companies.